Mgmt440 t10 Compensation Systems

8/2/2019 Mgmt440 t10 Compensation Systems

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Paul L. Schumann, Ph.D.

Professor of Management

MGMT 440: Human Resource Management

1 2008 by Paul L. Schumann. All rightsreserved.


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OutlineCompensation System ComponentsCompensation Equity IssuesEquity TheoryPay SystemsMarket-Based PayJob Evaluation Pay SystemsJob Ranking

Job Grading (Job Classification) Factor Comparison Point Method

Pay Policy Issues

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Compensation System

Components

Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.1, p. 485

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Pay

Benefits


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Compensation Equity

IssuesCompensation equity: Is compensation judged

to be fair?

3 Compensation equity issues#1: Individual equity: compare the pay of

individuals who do the same job in the sameorganization and judge if it is fair

Example: A retail store has 2 Assistant StoreManagers (2 people doing the same job in the sameorganization) If they are paid the same, is that perceived as being

fair?

If they are paid differently, is the pay differenceperceived as being fair? 4


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Compensation Equity

Issues3 Compensation equity issues (more)#2: Internal equity: compare the pay of differentjobs in the same organization and judge if it isfair Example: A retail store has an Assistant Store

Manager and a Store Manager (2 different jobs in thesame organization)

If they are paid the same, is that perceived as beingfair?

If they are paid differently, is the pay differenceperceived as being fair?

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Compensation Equity

Issues3 Compensation equity issues (more)#3: External equity: compare the pay of the

same job in different organizations and judge if itis fair Example: Retail store X has a Store Manager and

retail store Y has a store manager (the same job intwo different organizations)

Do the two stores pay their store managers the sameor not?

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Compensation Equity

Issues3 Compensation equity issues (more)#3: External equity (more) External equity pay policies:Match the market(match the competition): the

organization sets pay for some of its jobs to be aboutthe same as what other organizations pay for thesame jobs

No advantage or disadvantage in costs or inattracting and retaining employees

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Compensation Equity

Issues

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Compensation Equity

Issues

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Equity TheoryEquity theorydescribes how an employee

determines if his or her pay is fairAn employee judges if his or her pay is fair by

examining 4 factors:The employees pay (and other rewards)

The employees contributions

Other employees pay (and other rewards)

Other employees contributions

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Equity Theory Id feelunderpaid if:My

contributions

are the sameas my co-workers, butIm paid less

Im paid thesame as myco-workers,but mycontributionsare greaterthan my co-workerscontributions

Figure adapted from: Fisher,Schoenfeldt & Shaw

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Pay SystemsMethods of determining a range of pay for

each job in an organization:Market-Based PayJob Evaluation Pay SystemsJob RankingJob Grading (Job Classification) Factor Comparison

Point MethodOnce we have a pay range for each job, then

we can figure out where inside the pay rangeseach employee should fall

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Market-Based PayAlternative names: Market-Based Pay =

Market Pricing = Rank to MarketMethod (for each job title):Identify the relevant labor market Local, regional, national, or international

Obtain market pay data in the relevant labormarket

Either use pay data collected by others:http://www.salary.com/http://www.bls.gov/bls/blswage.htmhttp://www.google.com/Top/Business/Human_Resources/C

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http://www.salary.com/http://www.bls.gov/bls/blswage.htmhttp://www.google.com/Top/Business/Human_Resources/Compensation_and_Benefits/Compensation/http://www.google.com/Top/Business/Human_Resources/Compensation_and_Benefits/Compensation/http://www.bls.gov/bls/blswage.htmhttp://www.salary.com/


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Market-Based Pay

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Market-Based PayMethod (more):Use the market pay data on the average

minimum pay and the average maximum paydirectly to set the pay range (min to max) for the

job title If the external pay policy is:Match the market, then set the pay range for the job

to be about the same as the market pay range forthe job

Lead the market, then set the pay range for the jobto be a bit higher than the market pay range for the

job

Lag the market, then set the pay range for the job to16


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Market-Based PayStrengths:Not too complicated

Weaknesses:Assumes all jobs with the same job title in different

organizations are truly identical Example: We have to assume that all Store Manager jobs in

every retail store are identicalAssumes market pay differences correctly capture

internal equity issues Example: We have to assume that we want the pay difference

between our Store Managers and Assistant Store Managers tobe the same as in other retail stores

Hard to use with unique jobs If the job is unique to our organization, then we cant find

comparable jobs in other organizations, so we cant get marketpay data

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Job Evaluation Pay

SystemsAn alternative to market-based pay is to use a paysystem based on job evaluationJob evaluation: systematically determine the

relative value of jobs with an organization to createan internal hierarchy of jobs, and then use thehierarchy to set pay ranges for the jobsWhich job has the highest value to the organization

and so should be paid the most?

Which job has the second highest value and soshould be paid second highest?

Etc.

There are 4 job evaluation pay systems

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Job Evaluation Pay

Systems


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Job Evaluation:

Job RankingMethod:Review the job descriptionsRank the jobs in order of relative worth or importance

to the organization Frequently done by a committee of managers

Use the rank ordering to set pay for each job Pay the highest ranked job the most, etc.

Weaknesses:The rank ordering tells us that one job is worth more

than another, but not how much moreWhile the ranking takes care of internal equity, its

not obvious how to take into consideration externalequity

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Job Evaluation Pay

Systems


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o va ua on:Job Grading (Job

Classification)Method:Create a sequence of job grades Example: US Government GS system has 15 job grades:

GS1 GS15For each job grade, define the job grade in words Example: Define each job grade in terms of: Skill & knowledge Responsibilities

Physical effortWorking conditions

Use the job descriptions to classify each job into onejob grade Example (from the US Government GS pay system):

Carpenter = GS9 22

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Classification)Method (more)Select a set of benchmark (key) jobsJobs with well-known, stable job content

Jobs that are common in many organizations

Jobs that represent the full range of job grades

Jobs for which market pay data is available

Collect market pay data for the benchmark jobs

Use the market pay data to set the pay range forthe job grades Example:

http://www.opm.gov/oca/08tables/html/gs.asp

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o va ua on
http://www.opm.gov/oca/08tables/html/gs.asphttp://www.opm.gov/oca/08tables/html/gs.asphttp://www.opm.gov/oca/08tables/html/gs.asp


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Classification)Strengths:The sequence of job grades allows us to deal

with internal equity

The use of market pay data to set the pay rangefor each job grade allows us to deal with externalequity

Weaknesses:

The classification of jobs into pay grades issubjective Example: Carpenter = GS9, not GS8 or GS10 (are we

sure?)

The method relies heavily on job titles in setting

pay 24


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Job Evaluation Pay

Systems


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Job Evaluation:

Factor ComparisonMethod:Rank the benchmark jobs on the basis of each

compensable factor Example: Rank the jobs from least skilled to most

skilled

Collect market pay data for the benchmark jobs

For each benchmark job, allocate market pay

across the compensable factors Example: If market pay for a benchmark job is $15,

how much of that $15 is for skill, how much for effort,how much for responsibilities, and how much for

working conditions? 27


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Job Evaluation:

Factor ComparisonMethod (more)For each benchmark job, compare the factor

rankings to the pay rankings & make

adjustments as needed to bring the rankingsinto agreement Example: Make sure that the job ranked as having the

greatest skill requirements also has the greatestamount of pay for the skill compensable factor

Construct a job comparison scale, and slot thebenchmark jobs onto the pay scale for eachcompensable factor Example: For the skill compensable factor, create a

skill pay scale that shows where each benchmark

job falls on the scale 28


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Job Evaluation:

Factor ComparisonMethod (more)Slot all the non-benchmark jobs into their proper

places on the pay scale for each compensablefactor

Determine the pay for each job by adding up thepay from each compensable factor Example: Pay = pay from skill + pay from effort +

pay from responsibility + pay from working conditions Example: Fisher, Schoenfeldt, & Shaw (2006), Table

11.7, p. 498Job 4: Pay = $3.50 for skill + $2.50 for effort + $3.75

for responsibilities + $1.25 for working conditions =$11.00 29


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Job Evaluation Pay

Systems


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Job Evaluation:

Point MethodMethod:Define a set of compensable factors Compensable factors: the characteristics about jobs that

are used to set pay Example: 11 compensable factors:

(1) Education(2) Experience(3) Knowledge(4) Physical demands(5) Mental demands(6) Responsibility for equipment & work processes(7) Responsibility for materials & products(8) Responsibility for safety(9) Responsibility for the work of others(10) Working conditions(11) Job hazards

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Job Evaluation:

Point MethodMethod (more)Define a factor scale for each compensable factor Factor scale: define in words the different levels (or

degrees) of the compensable factor Example: Factor scale for the Knowledge factor: 1st Degree Knowledge: reading & writing; simple

arithmetic with whole numbers only; followinginstructions

2nd Degree Knowledge: arithmetic with decimals &fractions; use of formulas, charts, graphs, or diagrams

3rd Degree Knowledge: mathematics with complexformulas, drawings, or diagrams; precision measuringinstruments

4th Degree Knowledge: advanced trades mathematics;advanced use of complex formulas, drawings, ordiagrams

5th

Degree Knowledge: higher-level engineering math;advanced use of complex engineering theories & 32


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Job Evaluation:

Point MethodMethod

(more)Assign

points toeach degreeof eachcompensabl

e factor Example:

Source of table: Fisher,Schoenfeldt, & Shaw (2006),

Table 11.4, p. 49533


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Job Evaluation:

Point MethodMethod (more)Perform the job evaluation: evaluate each job to

determine the number of points to assign to that

job on each compensable factorUsually done by a committee of managers

Use the job descriptions as the source of jobinformation

Add up the number of points from each compensablefactor to get the total points for the jobJobs with more total points have more of the things

we value in setting pay

This should take care of internal equity

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Job Evaluation:

Point MethodMethod (more)Select a set of benchmark (key) jobs:Jobs with stable job content

Jobs that are common in lots of organizationsJobs that can be defined with precisionJobs that are performed similarly across different

organizationsJobs that represent the range of jobs being evaluatedJobs for which market pay data is available

Identify the relevant labor market for eachbenchmark job Local, regional, national, or international

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Job Evaluation:

Point Method

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Job Evaluation:

Point MethodMethod (more)Estimate the market pay lines Estimate 2 simple regressions using the benchmark

jobs as the data pointsMinimum pay line: regress minimum pay (dependent

variable) on points (independent variable)Maximum pay line: regress maximum pay

(dependent variable) on points (independent

variable)Use the market pay lines to determine the pay

ranges for each job (both benchmark & non-benchmark jobs)This takes care of external equity

Optional: create pay grades 37


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Job Evaluation:

Point MethodExample of a website that implements the Point Method(this website would be a good resource to use for theCompensation element of your Team Project):http://data.bls.gov/PDQ/outside.jsp?survey=nc Important note: The website uses pop-ups, so change your

browser setting to allow pop-ups from this website beforestarting

In Box 1, select the area based on the relevant labor marketfor the job title

In Box 2, select the occupation that includes the job title In Box 3, click the Get help choosing a Work Level button This will pop open a new window where you perform the job evaluation

using 9 compensable factors: Knowledge, Supervision Received,Guidelines, Complexity, Scope and Effect, Personal Contacts, Purposeof Contacts, Physical Demands, & Work Environment

Perform the job evaluation, then click Accept Level (this will pop youback to the other page); suggestion: use a committee to do the

job evaluation

In Box 4, click Get Data (this will pop open a new windowwith the results) 38
http://data.bls.gov/PDQ/outside.jsp?survey=nchttp://data.bls.gov/PDQ/outside.jsp?survey=nc


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Job Evaluation Pay

Systems


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Pay Policy IssuesPeriodically update the pay rangesJobs above or below the desired pay range:Green circle jobs:jobs whose current pay is below

the pay range for the job Develop & implement a plan to give these jobs slightly

larger pay increases to catch the job up with the pay rangeRed circle jobs:jobs whose current pay is above the

pay range for the job Develop & implement a plan to give these jobs slightly

smaller pay increases to allow the pay range to catch upwith the job

Compression: the pay differences across jobsshrink over timeCan mess up internal equity because the pay

differences across jobs gets too small

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Pay Policy Issues

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Broadbanding:combine adjacentpay ranges tocreate a smallernumber of pay

ranges in whicheach pay range iswiderMay help with red

& green circle jobs& with

compressionFrequentlyimplemented aspart ofrestructuring &downsizing

Source of figure: Fisher, Schoenfeldt, &Shaw (2006), Figure 11.7, p. 511


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Pay Policy IssuesSet the pay for each employee doing each job(where the employee falls inside the pay range forthe employees job)Methods: Seniority: Each employee moves up their pay range by the

same amount (usually determined as a percentage payincrease) Creates incentives for a stable, experienced workforceTypically used with unionized jobs, when merit pay isnt

accepted by employees, when it is hard to measure job

performance, or when there are very minor differences injob performance across employees (e.g., assembly line) Merit Pay: Each employee moves up their pay range based

on their job performance (creates incentives for improvedjob performance) Skill-based Pay: Each employee moves up their pay range

based on the skills & knowledge mastered by the employee(incentives to add skills) 42


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Pay Policy IssuesLegal issues in payFair Labor Standards Act (FLSA) 4 Primary provisions:

Minimum wage:

9/1/97: $5.15 7/24/07: $5.85 7/24/08: $6.55 7/24/09: $7.25

Overtime pay Restrictions on employment of children

Recordkeeping requirements http://www.dol.gov/esa/whd/flsa/Minimum wage set by state laws http://www.dol.gov/esa/minwage/america.htm

Example: Minnesota (for large employers): $6.15

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http://www.dol.gov/esa/whd/flsa/http://www.dol.gov/esa/whd/flsa/http://www.dol.gov/esa/minwage/america.htmhttp://www.dol.gov/esa/minwage/america.htmhttp://www.dol.gov/esa/minwage/america.htmhttp://www.dol.gov/esa/whd/flsa/


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Pay Policy IssuesEqual Pay Act: equal pay for equal workForbids sex discrimination in pay when the

employees perform the same job in the sameorganization If a man and a woman are both doing the same job in the

same organization, dont pay them differently because oftheir sexes Pay differences based on other factors is okay (e.g.,

seniority, job performance, etc.)

Comparable worth: equal pay for equal worthIf a man and a women are doing different jobs, but

the company evaluates that both jobs are of equalvalue to the company, then they should be paid thesame Example: If a companys job evaluation determines that a

secretarial job (held mostly by women) and a maintenancejob (held mostly by men) make contributions of equal value44


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OutlineCompensation System ComponentsCompensation Equity IssuesEquity Theory

Pay SystemsMarket-Based PayJob Evaluation Pay SystemsJob Ranking

Job Grading (Job Classification) Factor Comparison Point Method

Pay Policy Issues

Documents

Mgmt440 t10 Compensation Systems